By Tiernan Ray

Shares of LG Display (LPL) are down 47 cents, or 3.5%, at $13.12 after Macquarie Equities Research’s Daniel Kim cut his rating on the ordinary shares traded in Seoul to Neutral from Outperform, and cut his estimates, to reflect the risk of production cuts in Apple‘s (AAPL) iPhone, which surfaced yesterday following articles over the weekend in The Wall Street Journal and Japan’s Nikkei News Service that said orders for displays for the device had been reduced by as much as half by Apple.

Kim is inclined to give credence to the idea that Apple has sharply cut panel orders for the iPhone from LG this quarter, leaving the company with less room to make up for the fixed costs of its plants:

Profit margin on iPhone 5 in-cell touch screen should be disappointing in 1H13. We expect iPhone 5 panel orders to fall 40% QoQ in 1Q13 at LGD. This should be mostly driven by Apple’s broad-based order cut, not LGD’s relative vendor share loss within Apple. This poses a serious issue for LGD, since its newly built LTPS fab (AP2 in Paju) should suffer from circa 60% utilization rate. This growing fixed cost burden should lead the small size application segment to fall into losses compared to a double digit positive operating margin up until 4Q12. Order pick-up in 2Q12 should be minimal, since Samsung is scheduled to introduce its Galaxy S IV (GS4) in April with improved spec and user experience.

But Kim also goes further, opining that the iPhone and the regular-size iPad may lose ground to Samsung Electronics‘s (005930KS) more competitive “phablets,” the combination phone-tablet devices, such as the “Galaxy Note” series:

Our channel checks indicate that the 9.7” iPad model will not be refreshed in 2013. This raises a fundamental question: is tablet PC taking after notebook PC amidst threat from ‘phablet’? That is, innovation pace slows and the replacement cycle becomes longer from 1-2 year to 4-5 years. The iPad Mini business helps little to LGD due to its low price points and razor-thin margins […] The most worrying scenario is that iPad innovation cycle comes to an end. Moreover, the potential addressable market for iPad has been eroded by the proliferation of ‘phablet’, over 5” size screen smartphone such as Galaxy Note II. Without any new compelling reason to upgrade or refresh, the iPad is poised to take after the notebook, resulting in a much longer replacement cycle (from 1-2 years to 4-5 years). Then, LGD should feel much more pricing pressure […] We are afraid that Apple has lost its ground in the smartphone arms race against Samsung Electronics. This is especially after we saw the impressive next-generation Galaxy phones form factor of Samsung Electronics, at 2013 CES. We understand that Samsung is close to the mass production of plastic unbreakable substrate screen. In addition, larger size screen is critical to LTE smartphone, since the main purpose of a smartphone is migrating from communication (calling and SMS) to video consumption and web surfing. Then, iPhone’s 4” screen is likely to remain a drag versus popular phablet like Galaxy Note II. The worst case scenario would be that Apple exerts pricing pressure on LCD screen, when iPhone unit growth plateaus and LGD had sizeable idle capacity from order cuts.

Kim maintains his estimate for last year’s revenue at roughly ₩29.07 trillion, while slightly trimming his EPS estimate to ₩1,016 from ₩1,018. For 2013, he is modeling ₩30.78 trillion and ₩2,115 per share, down from a prior ₩33.34 trillion and ₩4,412 per share.

Add a Comment

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comment

There are 8 comments

JANUARY 15, 2013 11:25 A.M.

Bill wrote:

What is this, a Rupert Murdoch circle jerk? First MarketWatch pushing month old non-news which was soon put in perspective and the conclusion discredited. Then the WSJ, the National Enquirer for the hedge fund set. Then Paczkowski grabs the baton and runs with it. And now Barron's, which I'm told used to be reputable, but my memory can't recall when that might have been true. To parrot an old story, without explanation, is reprehensible. A fish stinks from the head brown, and now it appears we've gotten to the anus.

JANUARY 15, 2013 11:37 A.M.

Mike wrote:

The 9.7" iPad will not be refreshed in 2013? I've never seen garbage like this written anywhere...there's zero chance of that.

JANUARY 15, 2013 12:11 P.M.

LOL wrote:

9.7" Ipad won't be refreshed now? LOL. Wall Street is amazing.

JANUARY 15, 2013 12:12 P.M.

Jake_in_Seoul wrote:

Easy test for dismissing any and all analysts from Korea (including Daniel Kim, who is likely a Korean-American): have they *ever* criticized Samsung due to success of a non-Korean product? Especially his statement "Our channel checks indicate that the 9.7” iPad model will not be refreshed in 2013" strikes me as bordering on insider trading and market manipulation, if it is not a complete fabrication. How likely is it that he is privy to some of the most sensitive information Apple possesses? And how likely is it that Apple won't refresh a flagship product, even before Christmas?

Also, in Kim's limited defense, another sources of his potential bias: South Korea is a tough market for all foreign phones (the iphone is the only one, no HTC, Nokia, Motorola, Sony, etc.--they've all left due to failure in the Korean market), and he's seeing many Samsung and LG phablets on the subways, here in Seoul etc. Koreans I've talked to who've visited the U.S. come away amazed at the large number of iphones they see and the relative scarcity of Samsung sets. Kim probably can't help being influenced by the daily anti-Apple buzz in Seoul.

In short, I remain dubious.

JANUARY 15, 2013 12:57 P.M.

joseph cool wrote:

Aww did the article hurt the little Apple fanboys feelings?

JANUARY 15, 2013 12:59 P.M.

Market Mayhem wrote:

These people are just speculating. They don't know anything to be true. They have no proof to back them up. Anyone can make up fabrications. If they want to make up stories about Apple's future, they're welcome to do so. They're just hurting shareholders and potential investors.

JANUARY 15, 2013 1:36 P.M.

Squirtkjoe wrote:

I have to believe with a company sitting on as much cash as Apple, with as many customers, and with that many engineers isn't working on the next great thing. They aren't going to advertise all of their R&D for their competitors. I'm using this price drop as an opportunity to buy some shares at a discount.

I'm no fan of anyone except those who make me money. I don't care who it is. But the numbers speak for themselves. Apple looks to be on a pretty great sale right now.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.